How go the referrals?

It’s been some time since we’ve heard anything about the much-vaunted SME referral scheme. The last update came in July, when we learnt that the British Business Bank (BBB) had shortlisted the platforms that were to remain in the running for full designation. Somewhere between 10 and 20 platforms were shortlisted. We then moved into “Request for Proposal” territory, which will at some stage separate the wheat from the chaff.

Furthermore, a handful of Credit Reference Agencies (CRAs) were recently designated as points of SME credit information referral as part of the recent Autumn Statement. These designations are distinct from the mandatory referral scheme – which entails the referring of SMEs by the banks to the alternative finance space, via specialist referral portals. Instead, item 1.221 in the Autumn Statement states that Experian,Equifax and CreditSafe will receive SME credit information from designated banks, and will be required to provide “equal access” to this information to “all finance providers”.

But while the creases in the actual SME referral scheme continue to be gradually ironed out, what have the various referral portals been up to?

I caught up with Funding Xchange recently, one of the various middle-men to have been shortlisted by the BBB. Katrin Herrling, CEO of the platform, made it quite clear to me that the Funding Xchange business plan does not feature any expected revenues from the mandatory bank referral scheme in 2016. But that is not to say that the business does not expect to generate revenue next year. Indeed, it already is.

Funding Xchange recently tied up with KPMG Small Business Accounting in order to supply a channel for accessing capital to the firm’s SME customers. KPMG Small Business Accounting is a technology platform that contains a suite of small business-facing products, covering everything from accounting, to bookkeeping, tax, pension and payroll requirements. Access to capital aid stood out as something of a missing piece in the jigsaw – one that the Funding Xchange integration will help to address.

Funding Xchange links companies in need of finance to the alternative lending platform that is best suited to their needs. The platform operates an auction-based model, allowing SMEs to compare multiple funding offers and thus ensure an optimal blend of product type and price.

Funding Xchange has around 50 lending platforms plugged into the machine. Each of those lenders enjoys equal access to all loan applications, a departure from the traditional broking model. Traditional finance brokers often fail to give a fair market view. The heightened level of access provided by the Funding Xchange solution should allow for greater competition between lenders, and often a sweeter deal for SMEs.

The crucial advantage of the partnership for KPMG customers is speed, as it often is within the alternative finance space. Bivek Sharma, a partner in the Small Business Accounting team, told businessadvice:

“The last thing I want is my customers having to apply to 5-10 individual finance providers to find the right solution for their business. We use Xero, and Funding Xchange pulls information from its bookkeeping system to part-complete the application.”

“This means that within about ten minutes businesses can apply to 30 lenders at one go.”

And how are Funding Xchange’s main competitors faring?

Conrad Ford’sFunding Options has logged a few milestones of its own. The platform has taken on £2m in equity funding and has matched SMEs with over 50 different lending entities – ranging from the alternative players to the likes of Lloyds and Barclays. Interestingly only 17% of Funding Options' referrals to date have been to marketplace lenders.

Funding Options also has a longstanding relationship with Equifax. The two firms collaborate on an initiative by the name of Check Business. The online resource allows SMEs to gauge the state of their creditworthiness prior to applying for a loan – what Ford refers to as beginning the credit process “upstream”. Funding Options has also signed a partnership with one of the UK’s major accountancy firms – though we don’t yet know which one.

Funding Options’ Commercial Manager Steve Richardson was recently awarded “Introducer of the month” by the UK’s leading SME finance provider Funding Circle – having completed on 7 loans since August of this year. According to Funding Circle, Steve operates essentially as a traditional finance broker, but one that is attached to the Funding Options technology offering.

The grandfather of the referrals space Alternative Business Funding (ABF) has generated around 50,000 site visits in 2015, with an impressive 40% of these visitors clicking through to a funding provider (note that a click-through does not necessarily entail a funding match). Founder Adam Tavener tells us that ABF now refers to 75 different platforms, with another dozen hopefuls poised to enter into the fray soon. What Tavener described as the “latest iteration” of the ABF platform now allows funding providers to log in to a bespoke segment of the site, from which they’re able to both monitor traffic flows, and tinker with the volume and style of referrals that they receive.

Furthermore, ABF has tied up with Santander in much the same way as Assetz Capital and Funding Circle have. When the bank rejects a small business for finance, ABF is one of the solutions to which that small business may then be signposted. ABF is to date the only referrals portal to have joined forces with a major bank. Adam raised some doubt about the utility of partnering up with a major accountancy firm, suggesting that such collaborations are unlikely result in the kinds of transactional flows that are often advertised. Both Adam and Conrad identified smaller accountancy firms as a potentially more lucrative source of deal flow.

It’s significant that each of the referral platforms has formed some manner of partnership with an established SME facing service provider – whether it be a bank or CRA of accountancy firm. The run-up to the referrals scheme itself seems to represent something of an arms race for the various contenders, and plugging into the customer base of a major financial services provider appears to be the go-to method of creating traction.

Another common theme was that each of the major referrals players tells me that they are, truth be told, the only platform to be doing any real volume. Having spoken to a few of the major SME facing alternative finance providers, opinions on the current effectiveness of the referral portals appears to be split. Some positive feedback. Some cries of very little volume. Some questions around the value of re-intermediation (a recurrent theme within the broader industry).

Paul Mildenstein from Liberis – the merchant cash advance provider which recently tied up with Worldpay – suggested that he and the referrals players are essentially competing on marketing at the moment, and it’s not clear that the latter group are winning. They might need to start to if their value to the major funding providers is to be cemented.

We’ve sent around a number of requests for referrals data to the funding platforms themselves. Watch this space.

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